Ensuring the sustainability of retirement funds
South Africa’s retirement funds industry has experienced significant regulatory changes in recent years, with the proposed two-pot retirement system being one of the biggest recent changes.
With increased regulations comes increased costs that could potentially impact the sustainability of many retirement funds. Based on the results of PwC South Africa’s seventh Retirement Funds Survey publication, it is evident that the sustainability of current funds is crucial and should be a key focus area for the board of funds (the board) and the Financial Sector Conduct Authority as the primary regulator.
Julanie Basson, PwC South Africa Retirement Funds Lead, says: “Sustainability in this regard requires a knowledgeable and well-equipped board, supporting sub-committees and service providers that best suit the needs of the fund. It is important for the board to stay abreast of changes in the industry, while at the same time addressing the needs and well-being of their members. Service providers play an important role in a fund’s operations, and it’s important for boards to remember that when outsourcing services to service providers, it does not eliminate the board’s responsibility regarding proper internal control systems being in place.”
In our publication, we outline the latest findings based on the responses from 60 funds, 25% of which have assets greater than R10bn, 68% have assets greater than R50m but less than R10bn, and the remainder have assets less than R50m. They focus on:
- fund officials’ activities, their remuneration, and work arrangements;
- management of investments; and
- cybersecurity.
Key highlights from the report:
We found that the average number of board members and independent board members decreased from nine to eight, and three to two respectively, compared to the 2020 survey. Verwey Wiese, PwC South Africa Retirement Funds Partner, says: “What is clear is that proper governance comes at a price. In line with the previous survey findings, specialised funds all remunerate their boards, but compared to previous surveys (47% in 2020), 74% of respondents in this year’s survey said their board members are now being remunerated. The average annual retainer for a board chairperson is R375,550, while the average retainer for independent/professional board members is R301,046. A principal officer’s average retainer is much higher, coming in at an average of R730,904.”
For 51% of the funds surveyed, the level of remuneration for board members is set by the participating employer or sponsor. The remaining 49% said this decision is taken by the board or board sub-committee. Although we observed a steady increase in the average remuneration paid to board members and principal officers since our 2020 survey, the three-year rate increase was surprisingly below inflation, with only principal officers and chairpersons of specialist funds keeping in trend with inflation. The average rate per hour for a board chairperson has increased by 8.1% for stand-alone funds and 13.3% for specialist funds. The average rate per hour for independent/professional board members has increased by 5.9% for stand-alone funds and 5.5% for specialist funds. Similarly, the average rate per hour for the principal officer has increased by 15.7% for stand-alone funds and 27.1% for specialist funds.
On the management of funds, more than 32% of respondents said the fund’s investments are managed by more than 20 asset managers, and more than 95% are administered by a professional service provider. Only 25% of funds surveyed indicated that they have less than ten asset managers. Nolwazi Radebe, PwC South Africa Retirement Funds Associate Director, says: “The challenge to boards would be to decide on the optimal number of asset managers to employ, given the costs and governance efforts required, weighted against the investment diversification that can actually be achieved. One of the board’s responsibilities is to ensure that proper internal control systems are employed by or on behalf of the fund. This could be performed through the review and monitoring of the underlying asset managers’ International Standard on Assurance Engagements 3402 reports (ISAE 3402 reports) and/or internal audit report.”
Another prominent challenge in fund administration is cybersecurity which remains a pressing concern and key business risk in today’s modern business operating environment. Across all industries, we have seen that these types of attacks are on the rise, and the retirement funds industry is not exempt. Eleven percent of survey participants said their fund and/or service provider had a cybersecurity threat and/or attack during the most recent financial year of the fund, while 11% did not know. “Some survey respondents have included this cover in their fidelity insurance policy, with the maximum cover amounting to R5m, however 34% of funds remain without any form of cybersecurity cover, which means these remain unmitigated risks,” Basson says. “It is therefore evident that the need to have cybersecurity or some form of data protection cover is crucial.”
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